Process: 15/2013-T

Date: July 10, 2013

Tax Type: IRC

Source: Original CAAD Decision

Summary

In this tax arbitration case (Process 15/2013-T), the dominant company of a corporate group subject to the Special Tax Regime for Groups of Companies (RETGS) under Articles 69 et seq. of the Portuguese IRC Code challenged the calculation methodology for Municipal Surcharge (Derrama Municipal) for fiscal year 2010. The claimant had self-assessed €36,766.29 by summing the individual surtaxes calculated by each of the ten group companies. After filing a gracious objection requesting a refund of €1,896.79, which was denied based on Tax Administration Circular Letter 20132 of April 14, 2008, the company initiated arbitration proceedings at CAAD under Decree-Law 10/2011 (RJAT). The central legal issue concerned whether the Municipal Surcharge should be calculated on the consolidated taxable profit of the group (as determined under Article 64 CIRC through the algebraic sum of individual profits and losses) or on the sum of individual company taxable profits. The claimant argued that Article 14 of the Local Finance Law requires the surtax to be levied on 'taxable profit subject to IRC,' which for RETGS groups means the consolidated group profit, not individual company profits. The claimant contended that the Tax Administration's interpretation violated the fiscal unity principle underlying RETGS, exceeded constitutional limits by administratively redefining the tax base (Article 103(2) CRP), and contradicted Supreme Administrative Court jurisprudence, particularly the February 2, 2011 decision in Appeal 909/10 establishing that once taxable profit is determined for IRC purposes, the surtax base is necessarily thereby determined. The claimant sought a declaration of partial illegality of the self-assessment and indemnification including statutory interest, arguing the correct surtax amount should be €34,869.50 based on consolidated group taxable profit.

Full Decision

CASE NO. 15/2013-T

ARBITRAL DECISION

I – REPORT

  1. A (hereinafter identified only as the Claimant), Legal Entity No. …, with registered office at …, filed on 20 March 2012, a petition for the constitution of an Arbitral Tribunal, in accordance with the provisions of articles 2 and 10 of Decree-Law 10/2011 of 20 January (Legal Framework for Arbitration in Taxation Matters, hereinafter identified only by the initials RJAT).

  2. In the Initial Petition presented, the Claimant requested that the Arbitral Tribunal function with a sole arbitrator, as provided for in article 5, no. 2, of the aforementioned Decree-Law 10/2011, given that the value of the claim for pronouncement does not exceed twice the value of the jurisdiction of the Central Administrative Court.

  3. In the petition for arbitral pronouncement, the Claimant opted not to designate an arbitrator.

  4. Pursuant to no. 1 of article 6 of the RJAT, the Ethics Council of the Administrative Arbitration Centre designated a sole arbitrator, and following that designation and as from 4 April 2013, by order issued by His Excellency the President of the Ethics Council of the CAAD, the Arbitral Tribunal was duly and regularly constituted to consider and decide the subject matter of the case.

  5. The Claimant sustains, in summary, its claim as follows:

(i) That, in the fiscal year 2010, it was part of a group of companies (hereinafter identified only as the "Group"), of which it was the dominant company and which was subject to the General Tax Regime for Groups of Companies (RETGS), provided for and regulated in articles 69 and following of the Corporate Income Tax Code (CIRC);

(ii) That, in that fiscal year, the following companies were part of that Group:

· B, with Tax ID No. …;
· C, with Tax ID No. …;
· D, with Tax ID No. …;
· E, with Tax ID No. …;
· F, with Tax ID No. …;
· G, with Tax ID No. …;
· H, with Tax ID No. …;
· I, with Tax ID No. …;
· J, with Tax ID No. …;
· L, with Tax ID No. …;

(iii) That on 31 May 2011, the Claimant filed its Form 22 Declaration (the Group's declaration), relating to Corporate Income Tax (IRC), for the fiscal year 2010 (which was attached to the Petition filed as Doc. 1), having self-assessed the Municipal Surtax considered due in the amount of € 36,766.29.

(iv) That this amount corresponded to the sum of the surtaxes calculated in the different companies of the Group, and thus distributed:

· The Claimant itself calculated a surtax in the amount of € 27,655.94;
· Company J (fully identified above) calculated a surtax in the amount of € 1,533.29;
· Company C (fully identified above) calculated a surtax in the amount of € 89.53;
· Company G (fully identified above) calculated a surtax in the amount of € 3,654.48;
· Company D calculated a surtax in the amount of € 3,932.27;
· Company E (fully identified above) calculated a surtax in the amount of € 60.51;
· Company H calculated a surtax in the amount of € 869.28.

(v) That this Municipal Surtax was self-assessed by the Claimant within the voluntary payment period, as demonstrated by Document no. 9 attached to the initial petition;

(vi) That on 19 July 2012, and considering that the aforementioned assessment was not correct, the Claimant filed a gracious objection to that self-assessment (which was attached to the Petition filed as Doc. 10), through which it requested the reform of the self-assessment in question, the corresponding refund in the amount of € 1,896.79 plus the corresponding statutory interest;

(vii) That this objection was denied by order issued by the Head of the Administrative Justice Division of the Tax Directorate of … issued on 30 October 2012 (which was attached to the Petition filed as Doc. 12);

(viii) Where it was alleged that the instructions contained in Circular Letter no. 20132 of 14 April 2008 remained in force;

(ix) That the self-assessment of the surtax was based on errors of interpretation, because it took into account the taxable profits of the individual companies that make up the Group and not the taxable profit of the Group, a methodology that did not appear correct in light of the applicable legal rules at the time.

(x) That, in accordance with art. 14 of the Local Finance Law (hereinafter also identified by the initials LFL), "Municipalities may deliberate to levy an annual Surtax, up to a maximum of 1.5% on the taxable profit subject to and not exempt from corporate income tax, which corresponds to the proportion of income generated in their geographical area by taxpayers resident in Portuguese territory who exercise, as their main activity, a commercial, industrial or agricultural activity and non-residents with a permanent establishment in that territory."

(xi) That, as a result of this wording of the LFL, there was a profound change in the way the surtax was calculated, which came to be levied on the value of taxable profit in the context of IRC as an alternative to levying on the amount of the tax collected.

(xii) That, contrary to what the Tax Administration maintains in Letter no. 20132, referred to above, in the case of the RETGS, the taxable profit relevant for purposes of determining the Surtax owed should correspond to the algebraic sum of the taxable profits and tax losses calculated in the periodic declarations of each of the companies belonging to the Group, as results from article 64 of the CIRC.

(xiii) And not, taking into account the taxable profits calculated individually by the companies included in the Tax Group;

(xiv) That considering the understanding supported in the most recent jurisprudential developments, the doctrine of the aforementioned Letter of the Tax Administration constitutes an illegal interpretation of the applicable rules in the case at hand;

(xv) That, in accordance with applicable legislation and the understanding of Jurisprudence, it should be concluded that, in the fiscal year 2010, the calculation of the Group's Surtax should have been made on the basis of that Group's taxable profit relevant for purposes of IRC, and not on the basis of the taxable profit of the companies individually considered.

(xvi) That if the interpretation of the Tax Administration were to prevail, the entire logic of fiscal unity that underlies the RETGS would be annihilated;

(xvii) That the Tax Administration cannot, through generic information, alter the tax base of the surtax, disregarding that such tax base may only be determined by law, in accordance with article 103, no. 2 of the Constitution of the Portuguese Republic (CRP), as it constitutes a matter of the exclusive competence of the Parliament;

(xviii) That the aforementioned Letter is in clear non-conformity with the law, and that the Claimant is only obligated and bound to comply with the Law and not with instructions emanating from the Tax Administration (as indeed results from various Decisions handed down by the STA and from the best Doctrine – cf. Prof. Soares Martinez in "Tax Law", 7th edition);

(xix) That, regarding the method of calculating the surtax, the STA has also already ruled through the Decision of 2 February 2011 (confirmed in subsequent decisions also of the STA), handed down in the scope of Appeal no. 909/10;

(xx) Where the following is concluded: "And thus, once the taxable profit is determined for purposes of IRC, the tax base of the surtax is necessarily thereby determined."

(xxi) That, thus, in light of all the foregoing, with the surtax being levied on the taxable profit of the Group dominated by the Claimant, the surtax owed is € 34,869.50 and not € 36,766.29;

  1. The Claimant concludes its petition requesting:

(i) The declaration of partial illegality of the self-assessment of the disputed surtax, as it has been demonstrated that an error occurred in the self-assessment;

(ii) The indemnification of the Claimant for all damages suffered as a result of the excessive payment of the self-assessment of the disputed surtax, including the corresponding statutory interest, in accordance with the provisions of no. 2 of article 43 of the LGT and article 61 of the CPPT.

  1. In its reply, the Tax and Customs Authority (hereinafter identified only by the initials AT), first invoked certain Preliminary Objections, namely:

(i) From the articulation of certain legal provisions – see articles 238, 254 and 241 of the CRP, article 53, no. 1 h) of Law 169/99 of 18 September (LAL) and article 14 of Law 2/2007 of 15 January (LFL), article 2 of the Corporate Income Tax Code (CIRC) – it results that, in the specific case of the municipal surtax, the active subjects will be the Municipalities, being the passive subjects those identified in the aforementioned article 2 of the CIRC;

(ii) In the specific case of the surtax, the status of active subject is not limited to the role of recipient of the collection of that tax in so far as it also assumes an active role at the level of its assessment, with municipalities bearing not only the legitimacy to decide whether they intend to levy the surtax but also to decide which rate is applicable.

(iii) The Municipalities are thus responsible for, in large measure, the administration of the municipal surtax, and are therefore the active subjects of the tax.

(iv) In this way, the passive legitimacy to intervene in this litigation will likewise belong to the Municipalities and not to the AT exclusively, because its subject matter is exclusively the municipal surtax.

(v) From this – status of active subject and competence of administration – there also results a pressing interest of the Municipalities in acting, which reinforces their legitimacy to be a party to the case.

(vi) For this reason, the question of compulsory intervention of the Municipalities should be considered in cases dealing with the Municipal Surtax.

(vii) This compulsory intervention is further justified because the Municipalities, being the direct beneficiaries of the Municipal Surtax (as the State transfers to them the proceeds from the collection), will have a direct interest in the outcome of the action, as they will be obliged to refund the amounts received in case of an eventual adverse decision in this case.

(viii) The AT does not have the capacity to represent the Municipalities, because neither the RJAT nor Ordinance 112-A/2011 (Binding Ordinance) confer, in the understanding of the Respondent, on the highest-ranking official of the AT the role of representative of any entity other than the AT itself (previously DGCI and DGAIEC).

(ix) Thus, the Municipalities, in addition to not being properly represented, are not bound by the decisions of the Arbitral Tribunal.

(x) The Respondent thus considers that these circumstances necessarily entail the impossibility of an Arbitral Tribunal constituted under the aegis of the CAAD to consider itself legitimate to hand down an arbitral decision on the merits, whose subject matter encompasses the direct and personal interest of entities with legal personality and capacity that are not bound by its jurisdiction, nor represented in court, nor with their interests properly safeguarded.

(xi) This understanding of the procedural autonomy of the Municipalities is corroborated by the content of article 7 of Decree-Law 433/99 of 26 October and by no. 2 of article 54 of the ETAF.

(xii) In summary, the representative of the AT raised, essentially, the exception of the absolute incompetence of the Arbitral Tribunal, as well as, in light of the nature of the Municipal Surtax, the illegitimacy of the AT to be, solely and without the presence of the interested Municipalities, present in court and represent, in this suit, those Municipalities (this competence would fall to the representative of the National Treasury).

(xiii) The absence of the Municipalities is, in light of the foregoing, a ground of illegitimacy, and should the tribunal not find that we are in the presence of a situation of necessary joinder of parties, it is incumbent on it to enforce the requirement of compulsory intervention, with all the prerequisites of compulsory intervention being met.

(xiv) In these terms, the Respondent placed at the disposal of the Arbitral Tribunal the following preliminary questions:

1st – The passive illegitimacy of the AT – Tax and Customs Authority as sole defendant in matters relating to the Municipal Surtax;

2nd – The direct and personal interest of the Municipalities in acting in this litigation; and,

3rd – The cure of the defect of passive illegitimacy of the AT through an incident of compulsory intervention, which depends on the prior analysis of the question of the binding nature of the Municipalities to the decisions of the CAAD and the question of the incompetence of the Arbitral Tribunal to hand down a decision on the merits regarding the question at issue, inasmuch as it is not able to produce res judicata in relation to the Municipalities.

(xv) As a precaution, but without conceding, the AT, impugning, sustains the legality of the Claimant's self-assessment, rebuting the arguments invoked by the latter, namely questioning the legal basis supporting that the tax losses of some of the companies in the group may influence the tax base of the Surtaxes of the other dominated companies that are part of the group's perimeter.

(xvi) After analyzing the relevance of the Municipal Surtax in the national tax legal system, especially its relevance for the financial and tax autonomy of municipalities – constitutionally enshrined purposes – the Claimant pronounces itself on the legal nature of the Surtax.

(xvii) Thus, and considering the typology of taxes dominant in Portuguese Doctrine, the Surtax assumes the nature of a general, ordinary, direct, real, periodic and non-state tax (the active subject of the tax is the municipality, as a legal entity under public law).

(xviii) With regard to the perspective of principal or ancillary or independent tax, the Respondent considers that, in light of the new Local Finance Law – Law 2/2007 – the Surtax ceased to assume an ancillary nature, and the understanding of Prof. Saldanha Sanches (set forth in the Tax Review no. 38) should be endorsed, according to which it is necessary "to conclude that this tax is autonomous," and which only avails itself of the calculation rules of the IRC for determining taxable profit.

(xix) In light of this position and the provisions of the LFL, the Respondent concludes that:

(xx) The active subject of the tax is the municipality corresponding to the geographical area in which the income is generated, and there may be as many active subjects as there are municipalities where a company generates income.

(xxi) With regard to the real scope, the municipal surtax is levied on the taxable profit of the companies, and for purposes of determining the tax base of the Surtax, the legislator availed itself of the mechanisms provided for in the Corporate Income Tax Code.

(xxii) Where there is a group of companies taxed under the RETGS, each company that is part of that perimeter must, for purposes of Surtax, be taxed on the basis of its own taxable profit.

(xxiii) The new wording introduced by Law no. 64-B/2011 (State Budget Law for 2012) to article 14 of Law 2/2007 (Local Finance Law) was aimed at remedying its non-conformity with the Fundamental Law, as, from that change onwards, it came to be expressly provided that "when the special tax regime applicable to groups of companies is applicable, the Surtax is levied on the individual taxable profit of each of the companies in the group, without prejudice to the provisions of article 115 of the Corporate Income Tax Code."

(xxiv) The purpose of this change was to prevent the emanation of jurisprudence tainted with unconstitutionality because it violated the constitutional principles inherent in articles 81 and 238 of the CRP.

(xxv) In support of this understanding, the AT relies on the argumentation contained in the Decision of the Supreme Court of Justice (STJ), where, according to the AT, and in contrast to the doctrine emanating from Prof. Baptista Machado, it is defended that it is interpretive in nature the law which, on a point where the rule of law is uncertain or controversial, comes to enshrine a solution that jurisprudence, by itself, could have adopted.

(xxvi) The Administrative Doctrine resulting from Circular Letter no. 20132 had been challenged in two Decisions of the STA, both subscribed by the same reporter, so the legislator, in the exercise of its competences, decided to settle this divergence, introducing through Law no. 64-B/2011 (State Budget Law for 2012) a new wording to article 14 of the LFL.

(xxvii) This rule thus having a truly interpretive and not innovative nature, and therefore being applicable to prior situations.

(xxviii) The legislator did not expressly attribute an interpretive nature to this rule, because its intention, in the original wording of article 14 of the LFL, was already that taxation be realized in the terms now made explicit.

(xxix) In light of the foregoing in its reply, the Respondent concludes by saying that the Municipal Surtax levied by the Claimant does not suffer any irregularity, being manifestly in conformity with the law, for which reason its claim for refund of the self-assessed Surtax should not be granted.

  1. The Claimant did not exercise the right to reply with respect to the exceptions invoked by the Respondent.

II – FACTS FOUND PROVEN

  1. The Claimant – A – heads a group of companies, of which it is the dominant company and which is subject to the General Tax Regime for Groups of Companies (RETGS), provided for and regulated in articles 69 and following of the Corporate Income Tax Code (article 63 at the time of the tax facts invoked by the Claimant).

  2. On 31 May 2011, the Claimant filed its Form 22 Declaration (the Group's declaration), relating to Corporate Income Tax (IRC), for the fiscal year 2009 and levied, as Municipal Surtax, the sum of € 36,766.29.

  3. On 18 July 2012, and considering that the aforementioned assessment was not correct, the Claimant filed, in accordance with the provisions of article 131 of the Tax Procedure and Process Code (CPPT), a gracious objection to that self-assessment, which was received by the Amadora 2 Tax Service on the following day, that is, on 19 July 2012.

  4. This objection was denied by the Head of the Administrative Justice Division of the Lisbon Tax Directorate by order issued on 30 October 2012.

  5. The facts mentioned above are proven by the documents attached by the parties; other facts considered relevant to the decision which is the subject of this case were not proven.

It is now necessary to consider and decide.

III – DECISION

  1. ON THE PRELIMINARY OBJECTIONS

1.1. On the Competence of the Arbitral Tribunal

1.1.1. It is necessary and imperative to consider, in the first place, the question of the competence of the Arbitral Tribunal, because, if the tribunal is found to be incompetent to judge the question raised, the tribunal will not, by virtue of that incompetence, be able to analyze all other questions presented, whether by the Claimant or by the Respondent.

1.1.2. Thus, the Respondent bases its position on the fact that, with respect to the Municipal Surtax, the AT has only the functions of collection of that tax, which it must subsequently deliver to the municipality.

1.1.3. In this manner, the passive legitimacy to intervene in the litigation process will belong, not to the AT, but to the Municipalities, as the active subjects of this tax and holders of a direct interest in its resolution.

1.1.4. Therefore, the incompetence of the Arbitral Tribunal would result from the fact that the municipalities are not subject to arbitral jurisdiction, due to lack of binding effect.

1.1.5. That is, the Arbitral Tribunal is incompetent for the consideration of the question or questions raised, because the municipalities are not, in legal terms, bound by the decisions to be handed down by Arbitral Tribunals.

1.1.6. In the analysis of this question, we will follow closely the decision rendered in the scope of Case 5/2012-T handed down on 26.01.2012.

1.1.7. Thus, in accordance with that decision, which, with due deference, we transcribe, "…., in general the competence of the tribunal must be assessed in function of the claim formulated by the plaintiff and of the grounds (cause of action) that support it, taking into account the manner in which they appear formulated in the initial petition, regardless of whether or not they are well-founded. Competence is ascertained, therefore, in accordance with the quid disputatum or the quid decidendum as it is configured by the court (see, in this regard, among many others, the decisions of the Supreme Court of Justice of 04.03.2010, case 2425/07.1TBVCE.P1.S1 and of 10.12.09, case 09S0470, published at www.dgsi.pt)."

1.1.8. Now, in the case "subjudice", the claim formulated by the Claimant is the declaration of partial illegality of the act of self-assessment of the Municipal Surtax, being, therefore, related to the method of levying this tax within the context of the existence of a tax group subject to the RETGS.

1.1.9. Now, pursuant to subparagraph a) of no. 1 of article 2 of the RJAT, and in accordance with the provisions of article 2 of Ordinance no. 112-A/2011, the competence of arbitral tribunals includes the consideration of the illegality of acts of tax assessment.

1.1.10. From the said Ordinance, it is further clear that the AT is bound by the jurisdiction of Arbitral Tribunals, when it concerns taxes that are administered by the Respondent, that is, by the AT itself.

1.1.11. Now, there can be no doubt that the Municipal Surtax, despite the revenue reverting to the Municipalities, is administered by the AT.

1.1.12. Indeed, it is the AT that is responsible for conducting the procedure for assessment and collection of the Municipal Surtax, confirming the values declared and assessed by the taxpayers, and it is the AT that is responsible for issuing additional and/or ex officio assessments, and also for monitoring compliance with tax obligations in respect of this tax.

1.1.13. It is also an attribute of the AT to consider and decide on gracious objections which, in an initial phase of dispute, are filed by taxpayers, as well as to issue generic guidance concerning the application of the Surtax and to respond to requests for binding information.

1.1.14. That is, it is indisputable that the AT has the – exclusive – competence to perform acts of administration of the Municipal Surtax, despite municipalities being the creditors of the revenue collected and the active subjects of the tax relationship.

1.1.15. Now, as mentioned previously, the Arbitral Tribunal is competent to judge questions relating to taxes that are administered by the AT, here the Respondent.

1.1.16. Therefore, and in light of what has been set out here, the invoked exception of incompetence of the Arbitral Tribunal is deemed unfounded.

1.2. On the Procedural Illegitimacy of the Tax Administration and the Incident of Compulsory Intervention.

1.2.1. The question of the competence attributed to the AT for the management and administration of the Surtax has, equally, decisive implications at the level of representation in court.

1.2.2. First and foremost, it should be said that the legal provisions invoked by the Respondent to support the passive illegitimacy of the AT – article 7 of Decree-Law no. 433/99 (ordinance which approved the CPPT) and article 54, no. 2 of the ETAF – do not apply in the case at hand.

1.2.3. As for the second of the cited provisions (which provides that when "tax revenues collected and assessed by local authorities are at issue, the Public Treasury is represented by a law graduate or by a lawyer appointed for this purpose by the respective local authority"), the same is set aside because it is not the responsibility of the municipalities to assess and levy the Surtax.

1.2.4. Identical reasoning should govern the "exclusion" of article 7 of Decree-Law 433/99, as we are not, as has already been demonstrated, dealing with a tax administered by the municipalities.

1.2.5. Thus, just as it is stated in the Decision rendered in the scope of Case no. 22/2011-T of the CAAD (thesis which we endorse), and which, with due deference, we reproduce, "ensuring the AT, in accordance with legal provisions, the administration of the Municipal Surtax with respect to whose intermediate or final (administrative) acts it holds decision-making competence, it seems to be concluded that this entity has the powers for representation of the creditor entity in arbitral court with respect to the legality of acts of assessment or self-assessment of the tax revenue to which the proceedings pertain."

1.2.6. Further on in the same Decision, it is concluded that, in acting, the AT, in matters of Municipal Surtax, pursuant to a public law mandate, it will be the AT that holds the powers of representation in court, including arbitral court, unless express provision provides otherwise.

1.2.7. Now, there being no provision of this nature, it should be concluded that the passive legitimacy, exclusively, of the AT, to be present in court, even for consideration of the legality of tax acts whose creditor or taxpayer are the municipalities.

1.2.8. Furthermore, it seems by no means acceptable that the AT should perform most of the administrative tasks and interact exclusively with taxpayers (as becomes quite evident in the administrative proceeding which, within the scope of this proceeding, preceded resort to the Arbitral Tribunal) and then have arbitral jurisdiction taken from it on the grounds that it is not the AT that is responsible for that administration or that it is not responsible for it exclusively.

1.2.9. In these circumstances and, in light of the foregoing, the raised question of Procedural Illegitimacy of the AT is equally not verified, with exclusive legitimacy belonging to the AT to represent itself in court when the legality of an act of assessment of a tax is at issue, even in the case of a Municipal Surtax.

1.2.10. Verifying that exclusive competence of the AT, the consideration of the prior incident of compulsory intervention of the Municipalities is deemed prejudiced.

  1. ON THE PARTIAL ILLEGALITY OF THE SURTAX ASSESSMENT

2.1. On the Question of the Tax Base of the Municipal Surtax When There is a Group of Companies Subject to the RETGS

2.1.1. The question to be decided consists of determining whether, for purposes of determining the Surtax of a group of companies that is subject to the RETGS, the taxable profit of the Group should be relevant or whether, on the contrary, the taxable profit of each of the companies that make up that same Group should be considered.

2.1.2. It is appropriate, at an initial phase, to point out what is the applicable legal framework at the time of the facts.

2.1.3. The RETGS is presently regulated in articles 69 to 71 of the CIRC, which correspond to the prior articles 63 to 65, which were in force at the time of the occurrence of the tax facts under consideration in the present proceedings.

2.1.4. The aforementioned article 63 of the CIRC provided, in the wording in force in 2010, that "Where a group of companies exists, the dominant company may opt for the application of the special regime for determining the taxable matter in relation to all companies in the group."

2.1.5. Article 64 of the CIRC provided, in its no. 1, on the other hand, that "… the taxable profit of the group is calculated by the dominant company, through the algebraic sum of the taxable profits and tax losses calculated in the individual periodic declarations of each of the companies belonging to the group."

2.1.6. Finally, article 14 of Law 2/2007 (Local Finance Law) provided, at the time of the facts, that "Municipalities may deliberate to levy annually a Surtax, up to the limit of 1.5% on the taxable profit subject to and not exempt from corporate income tax generated in their geographical area by taxpayers resident in Portuguese territory who exercise, as their main activity, a commercial, industrial or agricultural activity……".

2.1.7. It is important to note the amendment introduced to this provision by Law no. 64-B/2011 of 30 December (State Budget Law for 2012), which came to establish an autonomous rule for the Surtax of determining the taxable profit, providing that, where applicable, the RETGS "…. the Surtax is levied on the individual taxable profit of each of the companies in the group, without prejudice to the provisions of article 115 of the Corporate Income Tax Code."

2.1.8. As we have already seen previously, the Claimant and the Respondent have diametrically opposed understandings regarding the question under consideration.

2.1.9. Indeed, the Claimant understands, based on article 64 of the CIRC at that time, that the Group of companies is taxed on an aggregated basis, as if it were a single taxpayer. And, sustained in this principle, it considers that, with the entry into force of the Local Finance Law, the Surtax came to be calculated on the basis of the taxable profit of the Group and not on the taxable profits of each of the companies that make up that Group.

2.1.10. On the contrary, the Respondent bases its position on the doctrine emanating from Circular Letter no. 20.132, which considers that "Within the scope of the special tax regime for groups of companies, the determination of the taxable profit of the group is made in the manner referred to in article 64 of the Corporate Income Tax Code, corresponding to the algebraic sum of the taxable profits and tax losses calculated in the individual periodic declarations. If it is true that in the individual periodic declarations there is no true determination of the tax collected, the same cannot be said with respect to the taxable profit. Indeed, each company determines a taxable profit in its individual declaration. Thus, for companies that are part of the perimeter of the group covered by the special tax regime for groups of companies, the Surtax should be calculated and indicated individually by each of the companies in its declaration, the Annex A also being filled in individually, if applicable.

2.1.11. The position defended by the Claimant has support – unanimous – in the jurisprudence of the STA.

2.1.12. Indeed, as appears from the Decision handed down in case 909/10 by the STA, "When the special tax regime applicable to groups of companies is applicable, the Surtax should be levied on the taxable profit of the group and not on the individual profit of each of the companies."

2.1.13. This position of the STA was reiterated in subsequent decisions, of which we highlight the one handed down, already in May 2012, in which it was reaffirmed that "I – In accordance with the current Surtax regime that results from the Local Finance Law, approved by Law 2/2007, of 15 January, the Surtax came to be levied on the taxable profit subject to and not exempt from IRC. II – When the special tax regime applicable to groups of companies is applicable, in light of the wording of art. 14 of the Local Finance Law prior to Law no. 64-B/2011, of 30 December, the Surtax should be levied on the taxable profit of the group and not on the taxable profit of each of the companies. III – Art. 14, no. 8, of the Local Finance Law, in the wording given to it by art. 57 of the State Budget Law for 2012 (Law no. 64-B/2011, of 30 December), is an innovative norm and not an interpretive one." (emphasis in original).

2.1.14. This last decision assumes particular significance, in that the Court pronounces itself on the nature of the modification introduced by the said State Budget Law for 2012, which, as already mentioned above, came to amend article 14 of the LFL, expressly providing that the Surtax is levied on the individual taxable profit of each of the companies making up the group.

2.1.15. Concluding that, from the analysis of the wording of article 57 of the State Budget Law for 2012 (the article that introduced the amendment to the aforementioned article 14 of the LFL), the said provision does not have an interpretive nature, having instead a completely innovative character.

2.1.16. And, being, consequently, applicable only for the future, thereby respecting, moreover, the principle, constitutionally enshrined, of the non-retroactivity of tax law (enshrined in article 103, no. 3 of the CRP).

2.1.17. From this it results that the regime resulting from the amendment introduced to article 14 of the LFL will only produce effects for the future, not being applicable to tax acts practiced before its entry into force.

2.1.18. Therefore, and following the Learned decision of the STA of 02.02.2011 in case 0909/10, reiterated in various subsequent decisions, and also the prior jurisprudence of the CAAD (which dealt with identical situations, some of them cited in the Initial Petition), we are of the understanding that, there being, at the time of the facts, no legal rule of the Surtax regime that specifically provided for determining its tax base, it should, when it comes to a Group of companies, be determined through the application of the rules of the IRC with regard to the taxation of groups of companies.

2.1.19. Thus, with the taxable profit, for purposes of IRC, being determined through the algebraic sum of the taxable profits and tax losses calculated in the individual declarations, identical rule should be applicable to determine taxable profit for purposes of Surtax.

2.1.20. That is, once the taxable profit of the Group is determined for purposes of IRC, the taxable profit for purposes of Surtax is automatically thereby determined.

2.1.21. It is, therefore, the conviction of this Tribunal that, at the time to which the tax acts pertain, the calculation of the Surtax owed by a group of companies subject to the RETGS should be levied on the consolidated profit of that group and not on the taxable profit of each of the companies that compose it, thus accepting the thesis invoked and endorsed by the Claimant.

2.2. On the Request for Statutory Interest

2.2.1 The Claimant further requests that, in addition to the refund of the amount of the Municipal Surtax that it levied, the AT pay statutory interest at the legal rate, in accordance with articles 43, no. 2, and 100, both of the LGT.

2.2.2. Article 43, no. 2 of the LGT provides that "It is also considered that there is error attributable to the services in cases in which, although the assessment is made on the basis of the taxpayer's declaration, the latter has followed, in its completion, the generic guidance of the tax administration, duly published."

2.2.3. Now, when it is determined that there was error attributable to the services, no. 1 of the said article 43 of the LGT provides that statutory interest is owed.

2.2.4. It was proven that the Claimant made the self-assessment of the Municipal Surtax on the basis of the understanding contained in generic guidance from the AT, more specifically Circular Letter no. 20132 of 14 April 2008.

2.2.5. For this reason, the Claimant is entitled to statutory interest, at the legal rate, from the date on which it made the payment of the amount of € 1,896.79 and the date on which the possible refund is made, as results from no. 4 of article 43 and no. 10 of article 35 of the LGT, nos. 2, 3, 4 and 5 of article 61 of the CPPT and article 559 of the Civil Code.

  1. CONCLUSION

In light of the foregoing, judgment is rendered rejecting the exceptions raised by the Respondent relating to the incompetence of the arbitral tribunal and the passive procedural illegitimacy of the tax authority, as well as rejecting the request for initiation of the incident of compulsory intervention, finding the request for annulment of the order denying the gracious objection and for correction of the self-assessment made by the Claimant to be well-founded, condemning the Tax and Customs Authority to refund to the Claimant the amount of € 1,896.79 (one thousand eight hundred and ninety-six euros and seventy-nine cents) plus statutory interest, at the legal rate, from the date on which it made the payment of this amount and the date of issuance of the corresponding credit note in favor of the Claimant.

Costs calculated in accordance with Table I of the regulations of costs for tax arbitration proceedings in function of the value of the claim, at the charge of the Respondent, which I fix at € 306.00 (three hundred and six euros).

Let notice be given.

Lisbon, 10 July 2013

THE ARBITRATOR

João Marques Pinto

The writing of this decision is governed by the old orthography.

Frequently Asked Questions

Automatically Created

How is the Derrama Municipal (Municipal Surcharge) calculated for corporate groups subject to the RETGS regime under Portuguese IRC rules?
Under Portuguese tax law, the calculation of Derrama Municipal for corporate groups subject to RETGS is disputed between two methodologies. The Tax Administration's position, reflected in Circular Letter 20132 of April 14, 2008, requires calculating the surtax by summing the individual surtaxes determined on each group company's separate taxable profit. However, taxpayers argue that Article 14 of the Local Finance Law, which levies the surtax on 'taxable profit subject to and not exempt from corporate income tax,' should be applied to the consolidated group taxable profit determined under Article 64 of the IRC Code. This consolidated profit represents the algebraic sum of taxable profits and tax losses of all group companies. Supreme Administrative Court jurisprudence, including the landmark decision of February 2, 2011 (Appeal 909/10), supports the consolidated approach, holding that once taxable profit is determined for IRC purposes under the RETGS regime, the surtax base is necessarily thereby established. The consolidated method respects the fiscal unity principle that underlies the RETGS regime and can result in significantly different surtax amounts, particularly when some group companies have losses that offset profits of other companies.
Can a dominant company in a RETGS group challenge the self-assessed Municipal Surcharge through tax arbitration at CAAD?
Yes, a dominant company in a RETGS group has legal standing to challenge a self-assessed Municipal Surcharge through tax arbitration at the Administrative Arbitration Center (CAAD). As demonstrated in Process 15/2013-T, the procedural path requires: (1) filing the group's IRC declaration (Form 22) with the self-assessed surtax, (2) submitting a gracious objection (reclamação graciosa) to the Tax Administration requesting correction of the self-assessment and corresponding refund, (3) awaiting the Tax Administration's decision on the objection, and (4) if denied, filing a petition for arbitration under Articles 2 and 10 of Decree-Law 10/2011 (RJAT - Legal Framework for Arbitration in Taxation Matters). The dominant company, as the entity responsible for filing the consolidated group declaration under RETGS, is the proper party to contest issues related to the group's taxation. The arbitration petition must be filed within the statutory deadline following denial of the gracious objection. The claimant can opt for a sole arbitrator when the disputed amount does not exceed twice the jurisdictional value of the Central Administrative Court, or may choose not to designate an arbitrator, allowing the CAAD Ethics Council to make the appointment.
What is the legal basis for the Special Taxation Regime for Groups of Companies (RETGS) under Articles 69 et seq. of the Portuguese IRC Code?
The Special Taxation Regime for Groups of Companies (RETGS - Regime Especial de Tributação dos Grupos de Sociedades) is established under Articles 69 et seq. of the Portuguese Corporate Income Tax Code (Código do IRC). This regime allows qualifying groups of companies to be taxed as a single entity rather than as separate legal persons. Article 64 of the IRC Code is particularly relevant as it defines how the group's taxable profit is determined: through the algebraic sum of the taxable profits and tax losses calculated in the periodic declarations of each company belonging to the group. This consolidation mechanism is the cornerstone of fiscal unity under RETGS, permitting intra-group loss offset and eliminating double taxation of intra-group transactions. To qualify for RETGS, groups must meet specific requirements including capital ownership thresholds (typically 90% direct or indirect participation), residence requirements, and applications must be submitted within specified deadlines. The dominant company assumes responsibility for filing the consolidated IRC declaration (Form 22) and paying the group's tax liability. The regime's fiscal unity principle means that the group is treated as a single taxpayer for IRC purposes, which forms the basis for arguments that ancillary charges like the Municipal Surcharge should also be calculated on the consolidated group taxable profit rather than aggregating individual company amounts.
How does the sum of individual company surcharges affect the consolidated Derrama Municipal in a RETGS group declaration (Modelo 22)?
The treatment of individual company surcharges in determining the consolidated Derrama Municipal for a RETGS group filing Form 22 is the central controversy in this area of Portuguese tax law. Under the Tax Administration's methodology (Circular 20132/2008), each group company calculates its individual Municipal Surcharge based on its separate taxable profit, and these amounts are then summed to determine the total surtax reported in the group's consolidated declaration. In the case at issue, this resulted in seven different companies contributing to a total of €36,766.29: the dominant company (€27,655.94), Company J (€1,533.29), Company C (€89.53), Company G (€3,654.48), Company D (€3,932.27), Company E (€60.51), and Company H (€869.28). Taxpayers challenge this aggregation method as incompatible with the fiscal unity principle of RETGS, arguing it ignores losses of group companies that would reduce the consolidated taxable profit under Article 64 CIRC. The alternative methodology applies the applicable municipal surtax rate (up to 1.5% as permitted by Article 14 of the Local Finance Law) directly to the group's consolidated taxable profit. This can produce a materially different result—in this case, €34,869.50 instead of €36,766.29, a difference of €1,896.79—because the consolidated approach allows loss companies to reduce the overall tax base, while the summation approach only taxes profitable companies and ignores loss companies entirely.
What procedural requirements must be met to file a tax arbitration request under Decree-Law 10/2011 (RJAT) regarding IRC and Derrama Municipal disputes?
To file a tax arbitration request at CAAD regarding IRC and Derrama Municipal disputes under Decree-Law 10/2011 (RJAT), taxpayers must satisfy several procedural requirements. First, they must exhaust the prior administrative remedy by filing a gracious objection (reclamação graciosa) with the Tax Administration and receiving a decision (or allowing sufficient time for deemed denial). The arbitration petition must be filed within the legal deadline following the administrative decision. The petition must comply with Articles 2 and 10 of the RJAT and contain: (1) identification of the claimant with tax identification number and registered office, (2) precise identification of the disputed tax act (in this case, the self-assessment of Municipal Surcharge), (3) statement of facts supporting the claim with attached documentary evidence (Form 22 declaration, payment proof, gracious objection, denial decision), (4) legal grounds for the challenge with citation of applicable legal provisions and jurisprudence, (5) specific conclusions stating the relief sought (declaration of illegality, refund amount, statutory interest), and (6) indication whether the tribunal should have one or three arbitrators based on the claim value. If the disputed amount does not exceed twice the jurisdictional threshold of the Central Administrative Court, a sole arbitrator may be requested. The claimant may designate an arbitrator from the CAAD list or allow the CAAD Ethics Council to make the appointment. The petition must be accompanied by required supporting documents and the arbitration fee. Once properly filed and the arbitrator(s) appointed, the CAAD tribunal is constituted and has jurisdiction to review the legality of the tax assessment.